Segmental Reporting

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Segmental Reporting

1 Introduction to segmental reporting

Segmental reporting can be seen as “the analysis of the financial information of an enterprise or group between the different business activities and/or the different geographic areas in which it operates” . The reason for this reporting division into different business activities and geographic areas is that these have different profit potentials, growth opportunities, degrees and type of risk, rates of return and capital needs. Because of these differences, it is possible that consolidated financial statements are not sufficient (these financial statements summarize the results and financial position for the reporting entity as a whole). The disclosure of information about an enterprise’s operation in different industries, its foreign operations and export sales, and its major customers, as an integral part of financial statements, may provide a solution to this problem (Thoen and Lefebvre, 2001).

2 Origin of segmental reporting

Four theorems that are characterized by an accounting or a financial background can be considered as factors that created a need for the segmentation of information. In the following paragraphs, a brief description of these theorems will be given.

2.1 The fineness-theorem

This theorem states that “given two sets containing the same information, if one is broken down more finely, it will be at least as valuable as the other set.” Applied to segmental reporting, this means that the segmented information will always contain information that is as usual and valuable as the information provided by aggregated financial statements.

2.2 Market efficiency theory

According to Fama (1970), three kinds of efficiency can be distinguished, depending on the available information: (1) weak form efficiency, (2) semi-strong form efficiency, and (3) strong form efficiency. A market is efficient in the ‘weak form’ when all past prices are reflected in today's price. A market is efficient in the ‘semi-strong form’ when prices reflect all public information. At last, a market is efficient in the ‘strong form’ when all information in a market, whether public or private, is reflected in the price.

The reporting of segmented information by companies may be useful to create more efficient markets. This is because this kind of information increases the tra...

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...on the internal corporate structure, and (4) segments for each individual market in which the company is operating. Corporations may obviously also make a combination of these dimensions. The choice of the segmentation base depends on the type of company and on should be made with the intention to optimise the entity’s financial reporting.

5.2.2.2 Difficulties related to the information to be disclosed

References

Emmanuel, C. & N. Garrod (1992). Segment reporting: International issues and evidence. Prentice Hall, ICAEW

Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of finance, Vol. 25, pp. 383-417.

Flower J. & G. Ebbers (2004). Global Financial Reporting. Palgrave Basingstoke.

Mautz R.K. (1968). Financial Reporting by Diversified Companies. Financial Executives

Research Foundation, New York.

Radebaugh L.H. & S.J. Gray (1993). International Accounting and Multinational Enterprises. John Wiley & Sons (USA), 3rd edition.

Thoen V. & C. Lefebvre (2001). A critical analysis of segmental reporting based on an international perspective: a ground for better regulation. DTEW Research Report 0152, K.U.Leuven, 34 pp.

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